June 2023 – Bond Market Review

Recent economic data continues to suggest positive but below trend growth this year. Although the pace of job growth is moderating, labor markets remain solid, and the U.S. consumer has demonstrated resiliency.   Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the Federal Reserve is likely near a pause in their rate hiking campaign. If moderate growth continues, we believe the Fed will likely maintain the Federal Funds rate in restrictive territory until inflationary pressures subside.

At the May meeting, the Federal Open Market Committee (FOMC) voted unanimously to raise the target federal funds rate by 0.25% to a range of 5.00 - 5.25%. Notably, the committee omitted a line from its March statement referencing that “some additional policy firming may be appropriate.” Instead, the FOMC will determine “the extent to which additional policy firming may be appropriate”, implying a potential pause that is data dependent. Fed Chair Powell reiterated the committee’s focus on bringing down inflation to their 2% target and indicated that their outlook did not support rate cuts, contrary to the market consensus. The statement also emphasized that the U.S. banking system is “sound and resilient” and acknowledged the tightening of financial conditions. Considering the totality of economic data, the Chandler team continues to believe the Fed is likely near a pause in their rate hiking cycle and will maintain higher rates for some time.

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